There is a persistent belief that large amounts of short selling will put a weak company over the edge-even drive it into bankruptcy.
Is there any hard proof that supports this?
As far as I know, it becomes interesting to “short” a stock (see in anticipation of a price decline), when:
-investors see a future of greatly diminished earnings for the firm
-large amounts of the stock are held by short-term investors
- (worst case) inside information about disasters becomes common knowledge
I see “short selling” as normal speculation-only that the sellers see a price decline instead of an increase.
The most recent example I remember was the case of ENRON. As we now know, the management of ENRON was falsifying its financial data-they were hiding losses and making it appear that the firm was profitable. A leading investment firm checked their financial statements, and concluded that the firm was losing money-they then shorted massive amounts of Enron stock-they made a fortune, and Enron went bankrupt (and a lot of Enron executives went to jail).
So is shortselling an indication of bad management, or does it actually cause firms to fail?